Thursday, December 6, 2012

Eliot Spitzer on tax reform

Eliot Spitzer has posted two short essays on Slate in which he suggests that we tax capital gains and dividends the same as ordinary income, and also institute a "financial transactions" tax. Here are the links:Raising Capital Gains Tax

4 comments:

Spitzer wants to increase taxes on dividends and capital gains to make the tax system "more progressive". Sounds like you agree with that, but it doesn't sound very fair to me. Why should someone who chooses to invest/save their after-tax income from their salary end up paying more in taxes than someone who has the same pre-tax salary but chooses to spend all of their take-home pay? It's not "progressive" when two people with identical opportunities pay different amounts of taxes over their lifetimes based on their spending and saving decisions.

Does the country need to tax my investment income? Unfortunately yes since the deficits are so large. But fairness or progressiveness don't seem to apply.

I don't think your complaint is valid. You are not being taxed on your "after tax income" you are only being taxed on the *additional* money that your after tax income "earns" when you invest it.

Also, you don't understand what "progressive" means in the context of income tax. It simply means that wealthy people pay more. The justification for this is quite simple. The goal of "progressive" taxing is that we all bear the same tax *burden*. A wealthy person paying 15% has less of a tax burden than a poorer person paying the same percentage. This is because a wealthier person has much more *extra* money after paying for necessities such as food, shelter, and medical care.

In a simple example, citizen A makes $10,000 and must pay out $9000 to be able to live. If A pays 15% in taxes, then A must use pay $1500 in taxes, so must take $500 out of living expenses (food? rent? medicine? Citizen B makes $100,000 so must pay out $15,000 in taxes, leaving B with $85,000. Even if B spends $20,000 to live (more than twice as much as A), B is still left with $65,000 to use for diamonds, yachts, fancy college for A's children, or to invest to make more money.

Progressive taxing tries to equalize the burdens of taxing on these two citizens. B might be asked to pay 35% or $35,000 in taxes. This still leaves B with $45,000 above "cost of living" as opposed to -$500 for A.

Get the idea?

If you are fortunate to make $500,000 and have to pay a marginal rate of 40% on your last few hundred thousand dollars, you are doing quite well and shouldn't complain. I doubt that you work much harder than most people who earn far less -- many of whom have to work several jobs to support their families. Enjoy your surplus money, and pay taxes on whatever it earns through investment.

You didn't read or understand my answer. They didn't make the same amount of money. One made X dollars and the other made X + the investment return on X. The latter paid an extra amount in taxes only on "the investment return on X" (they both paid tax on X).